Monday, February 24, 2014

Aussie / Kiwi pair: a temporary reversal? | First, do no harm

Since mid January we have
been singing the praises of the New Zealand dollar,
known as the Kiwi, particularly as it might behave against the Australian
dollar. In the immediate aftermath of this commentary the pair did, indeed,
behave as expected. However, global events intervened to undo the fall that was
proceeding apace, in particular those related to economic wellbeing in the USA
where employment reports, manufacturing output and economic growth indicators
seemed to stall. Many believe that these readings are related to the very
severe weather that a lot of the USA is experiencing, and are therefore
temporary in nature.

Now, it is a truism that
while prices and rates of various financial instruments do rise or fall, often
as expected, they do not do so in a straight line, and a reversal like the one
above can happen at any time. Given that the fundamentals we discussed in our
earlier articles remain in place, mainly to do with interest rate differentials
and the high desire of the Australian authorities to devalue their currency, we
see no reason to change our opinion on the likelihood of a further fall in
AUDNZD. Getting the timing right on this is, as usual, the real test. In the
meantime it can be depended upon that we will not be going long on this pair.

First, do no harm

It is a fundamental principle
of medicine that physicians should ensure that the treatment they provide to
their patients should not result in any harmful side effects. Therefore great
care is taken to control risks in medical treatment and in the testing of new
drugs and procedures.

In Foreign Exchange trading
exactly the same principle must apply. The Forex market participant that makes
profit the primary motivation for his or her activity from the outset is making
a mistake. The main focus must be at all times on the control of risk and the
retention of capital. Once the techniques for these are well understood and
acted upon, profits will follow. When this happens the same care must be taken
to ensure that it is retained.

These are the principles that
drive everything we do here at OmiCronFX.